To Our Clients, Colleagues and Friends,

· This is not 1929, and we’re not going into a Great Depression.  More than 1,300 banks failed in 1929-1930, and we’ve had only 15 bank failures so far this year. Unemployment was 25% then – versus about 6% today.  When FDR took over in 1933, a shocking 44% of all montages were in default.  And the stock markets?  What is it now, down about 35-40%?  From the late 1929 to mid-1932, the Dow Index dropped 90%.  People, let’s all calm down.  It’s pretty awful out there, but we’re not headed for a Depression.

· Now that valuations are coming back down to earth, we have a suggestion.  Let’s have the appraisers use replacement cost a bit more.  This might not be the best analogy, but using tulip bulb comps in the middle of the Tulip Bulb Bubble may not be that valuable.  At some point, you need to look at what the real cost of producing a tulip bulb might be. Or a house.

· Today is Ralph Lauren’s 69^th birthday.  He was born Ralph Lipshitz, we kid you not. Can you imagine if he hadn’t changed his name, trying to promote the Polo brand with a spokesman-founder named Lipshitz?

· Some of you scoffed at our thought last week that wholesale originations could be banned, and we do think it’s highly unlikely.  But what if there were a surcharge?  What if investors decided that the higher loss rates in wholesale warrant charging an extra 5-10 bps in rate on third party loans?  It sounds possible, and wouldn’t that almost be the same as killing off TPO?  Our only point was that strategic thinking requires that you plan for what might seem like the un-plannable, that you occasionally think about the unthinkable.

· Even more relevant than when we ran this only a few short weeks ago:

But 5-10 years from now, you’ll hear people talk about how they bought certain stocks so cheaply in late 2008.  Maybe stocks will go lower, maybe a lot lower, but in 10 years people will look back on this period as an unbelievably opportunity.

· Warehouse line update:  Although it’s gotten very difficult to get good warehouse lines, we’ve been successful and are still batting 1000 in helping clients get them.  Sometimes it can take longer than we’d like, but good lenders with solid financials are all getting funding.  Two-three years ago we didn’t do any of this, as anyone with $250,000 on a financial statement could get a line.  Today, we’re working with clients in all four corners of the nation in getting them new warehouse lines.

• An interesting quote from J. M . Barrie, the author of Peter Pan:  “The life of every man is a diary in which he means to write one story, and writes another.”  Isn’t that so true? 
• Old rules of the new road:  (a) Make certain you’re cash flow positive every single month, (b) don’t spend money you don’t have, and (c) as hard as it sounds, refuse to lose even one dollar in a given month. Always always always be profitable, even if it means only making $1.  Refuse to spend a penny more than your revenue.  If you aren’t there, it just means that you haven’t maximized your revenues or, more likely, that you haven’t made enough spending cuts.
• Someone asked us about an All-Time Milwaukee Braves team.  We never followed them that closely, but we sure remember Hank Aaron, Eddie Mathews, and Joe Adcock – with Lew Burdette and Warren Spahn on the mound. 
• It was the Braves pitchers of whom someone once wrote “Spahn and Sain and pray for rain”. The ditty was inspired by the performance of the two pitchers during the Braves’ 1948 pennant drive. The team, they were the Boston Braves then, swept a Labor Day doubleheader, with Spahn throwing a complete 14-inning win in the opener, and Sain pitching a shutout in the second game. Following an off day, it did rain. Spahn won the next day, and Sain won the day after that. Three days later, Spahn won again, and Sain won the next day. After one more day of rain, the two pitchers were brought back, and won another doubleheader. The two pitchers had gone 8-0 in twelve days’ time!
• We heard someone on the radio talking about winning the “hearts and minds” of the Iraqi people, and it reminded us of a great story about Lyndon Johnson and the war in Vietnam . His Vice-President Hubert Humphrey was going on and on about how to win the hearts and minds of the Vietnamese peasants, and an exasperated LBJ jumped in and shouted “Dammit, Hubert, let me tell you how to win the hearts and minds of men.  You grab ‘em by the balls and twist real hard, and I guarantee you that their hearts and minds will follow you wherever you go.”  A great story.  And true. 
• New Presidents always make for an easy baseline when measuring things.  In 2000 when bill Clinton left office, about 35% of U.S. Treasuries were owned by foreigners. When George Bush leaves office in a few months, it will be closer to 65%.
• One of the more fun aspects of what we do:  Training Board members. So far we’ve done trainings in the area of Secondary Marketing (interest rate risk management) and, for more diversified institutions, Mortgage Banking Risk in general, covering many sub-topics.  We’re impressed at today’s generation of Board members, all of whom seem very eager to better understand their banks.  We’ve also found that anything over about 90 minutes per session is too much for most of them.
• What’s strange working with Boards is that they are still all male.  We haven’t done any counts, but we’d guess that the Boards of community banks, at least the ones we’ve met, are about 90% male. Seems like a big part of the pool of intelligent people is not being used. Kind of strange for 2008.
• Random thought:  All the financial blow-ups of the past year have been companies run by men.  AIG, Bear Stearns, Lehman, FNMA, Wamu, etc. Is there something about machismo and testosterone that causes men to take bigger risks?  Is there some preternatural link to the gorilla pounding his chest and showing that he’s the toughest guy in the jungle?  Or is it that women just haven’t had the opportunities yet to make big bets and cause huge disasters?  Or is this a stupid conjecture in the first place?

Joe Garrett and Corky Watts  -  Garrett, Watts & Co.

510-469-8633 or 408-395-5504